01653cas a2200241 a 4500 AALejournalIMF007592 230101c9999 xx r poo 0 0eng d 5.00 USD 9781451979992 1018-5941 BD-DhAAL BD-DhAAL Svensson, Lars. Target Zones and Interest Rate Variability / Lars Svensson. Washington, D.C. : International Monetary Fund, 1990. 1 online resource (52 pages) IMF Working Papers <strong>Off-Campus Access:</strong> No User ID or Password Required <strong>On-Campus Access:</strong> No User ID or Password Required Electronic access restricted to authorized BRAC University faculty, staff and students The trade-off between interest rate variability and the width of an exchange rate target zone is examined, using the regulated Brownian motion model of target zones. The interest rate differential's asymptotic (unconditional) variability is increasing in the exchange rate band for narrow bands; whereas it is slowly decreasing for wide bands. The interest rate differential's instantaneous (conditional) variability is decreasing in the exchange rate band. The model is extended to include a realignment/devaluation risk, as well as an endogenous exchange rate risk premium. The risk premium is small for reasonable parameter values. Mode of access: Internet IMF Working Papers; Working Paper ; No. 1990/031 Full text available on IMF http://elibrary.imf.org/view/journals/001/1990/031/001.1990.issue-031-en.xml IMF e-Library